Beware the Cadillac tax

If you haven’t yet learned about the coming “Cadillac tax” on health benefits, get ready.

Set to take effect in a little more than two years, the 40-percent federal excise tax on the value of benefit-rich health policies that exceed a certain threshold may affect far more employers than initially believed. Beginning in 2018, the tax will hit benefits plans that have an actuarial value of $10,200 for single-person coverage, and $27,500 for family coverage.

Policies above those value thresholds will get taxed, a cost that health insurers, presumably, will pass on to employers.

In the 2015 national benefits survey by Mercer, 23 percent of responding large employers said they have at least one benefit option that, based on current premiums, will exceed the thresholds for the tax. By 2022, that grows to 45 percent, according to the Mercer survey.

And many of the plans that will hit the tax’s threshold “are not what we consider rich plans,” said Mick Young, the leader of Mercer’s Grand Rapids office.

That’s a reflection of an unintended consequence of the Cadillac tax and how policies for people with high-cost chronic medical conditions can easily exceed the value thresholds.

When enacting the Affordable Care Act in 2010, Congress failed to take into account that many health plans sponsored by large employers and unions “don’t necessarily have rich plans designs. They have people who are high users and drive the costs up,” said E.J. Pearson, president-elect of the West Michigan Association of Health Underwriters. The group represents about 230 insurance agents and brokers in the region.

The number of employers affected by the Cadillac tax could have been higher had many not already made changes to their health coverage through reduced benefits or increased employee contributions.

“Employers have taken action,” said Mercer’s Young. “They’ve done some basic things to move the needle and get themselves out of trouble.”

Meanwhile, there’s plenty of activity to get rid of the Cadillac tax, which was designed to tax the costliest benefit plans to slow down medical spending and raise revenue to pay for extending health coverage to the uninsured.

Bipartisan legislation to repeal the tax has the support of more than 300 members of Congress, according to the Alliance to Fight the 40, a coalition of interests advocating repeal. In a show of bipartisan support behind the issue, the U.S. Senate voted 90-10 this month to include an amendment repealing the tax in legislation to dismantle the Affordable Care Act — which, even if it passes Congress, will surely face a veto from President Obama.

Pearson calls the Cadillac tax “the next big impact” on employer-sponsored health coverage from the Affordable Care Act that will become a “major topic” in next year’s presidential election.

“The excise tax, if it’s not repealed, could be devastating,” said Pearson, the vice president of benefits at Lighthouse Insurance Group in Grand Rapids. “By repealing the tax, we’re going to protect employer-sponsored health benefits.”

Even with the repeal movement gaining momentum, both Young and Pearson urge employers that have not already done so to examine if the Cadillac tax will affect them, whether in 2018 or subsequent years. The experts advise employers to plan accordingly.

“You don’t want to be stuck all of a sudden and not have done anything for it,” he said. “This is really about how long you can defer before you hit the threshold. Is it going to hit you in 2018 or 2022? When is it going to hit?”